The stock market has continued to pull back for the past two weeks after a strong bounce from the November lows. The past two weeks have been very difficult to trade with little follow through to either side. Overall, the pattern of a consolidation from the October highs remains intact, although most of the indexes are vulnerable to further selling as it stands.

This pattern is quite evident when looking at the S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF. Overall, it's easy to see how SPY has been drifting back since October, although the past four weeks have seen some violent moves. Most of the selling has occurred in the vicinity of the 200-day moving average, which currently stands near $126. SPY basically pulled back the past two weeks to fill an open gap in the $122 area, but is holding below the 50-day moving average in the process. SPY is in a pivotal area here, as further downside would likely imply a test or breakdown through the November lows. However, a bounce from these levels may signify a higher low and a likely breakout above the current pattern. (For more, see Moving Averages: Introduction.)

The DJ Industrial Average, as represented by the Diamonds Trust, Series 1 (NYSE:DIA) ETF, is following a similar pattern. There are a few differences, such as DIA holding above its open gap and 50-day moving average, but much of it can be attributed to the fact that the index only follows 30 stocks and may be influenced by a couple of standout stocks like McDonald's Corporation (NYSE:MCD). DIA is currently sitting right on its 20, 50 and 200-day moving averages, which could be a positive, except DIA has been under constant pressure for the past two weeks. DIA could come back to fill the open gap near $116, although any lower and DIA could threaten to become unraveled.

The Nasdaq 100, as represented the Powershares QQQ ETF (Nasdaq:QQQ) ETF, continued to perform poorly and closed underneath all its key moving averages. QQQ is quite vulnerable where it stands, with the November lows right in its sights. Apple, Inc. (Nasdaq:AAPL) has been acting poorly, which is certainly weighing the index down. QQQ is oversold, which may work in the bulls favor, but as it stands, this average looks like it may be headed lower.

The small caps as represented by the iShares Russell 2000 Index (NYSE:IWM) ETF closed right on its 20 and 50-day moving averages. It held fared a little better than SPY and QQQ by closing well off the prior gap and near its key averages. This is one group that could take a leadership role into the new year, so its relative strength should be payed attention too regardless of how minor in magnitude. It's possible that IWM will drift back towards $70, but its critical that IWM hold up in this area and form a higher lows. Any sustained weakness under this weeks lows would imply a trip back down under the November lows.

The Bottom Line
The bottom line is that the markets remain quite vulnerable despite the fact they could be close to setting higher lows above the November pivot lows. One factor that may work in the markets favor is that the indexes are starting to get oversold after two weeks of selling. We have been expecting strength towards the end of the year, but the markets have not been making it easy. The indexes remain vulnerable in their current positions and much will be decided in the next week. If the markets dip under their November lows, it could lead to much lower prices. However, any bounce from these levels could catch short sellers off guard and lead to a break above the current consolidation. (For more, see Technical Analysis: Introduction.)

Charts courtesy of stockcharts.com

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing Basics

    Free Cash Flow Yield: A Fundamental Indicator

    Free cash flow can measure a business’s performance as if you’re looking at its net income line.
  2. Technical Indicators

    Four Commonly Used Indicators In Trend Trading

    No single indicator can punch a ticket to market riches, but here are four that remain popular among trend traders.
  3. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  4. Active Trading Fundamentals

    4 Stocks With Bullish Head and Shoulders Patterns for 2016 (PG, ETR)

    Discover analyses of the top four stocks with bullish head and shoulders patterns forming in 2016, and learn the prices at which they should be considered.
  5. Chart Advisor

    Uptrending Stocks Dwindle, a Few Remain (EW, WEC, WR)

    The number of uptrending stocks is shrinking, but here a few that remain in uptrends.
  6. Chart Advisor

    Trade Setups Based on Descending Trend Channels (LBTYK, RRC)

    These descending trend channels have provided reliable sell signals in the past, and are giving the signal again.
  7. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  8. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  9. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  10. Mutual Funds & ETFs

    ETFs Can Be Safe Investments, If Used Correctly

    Learn about how ETFs can be a safe investment option if you know which funds to choose, including the basics of both indexed and leveraged ETFs.
RELATED FAQS
  1. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  2. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  3. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  4. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  5. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  6. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center